George Soros, a famous money manager, has a unique investing strategy. It’s considered controversial. But can it help you get rich and retire early?
The famous billionaire started his Quantum Fund in 1969. If you had invested $1,000 back then, you would have ended up with $4m by 2000. This would have made your total return 30% per year. That’s what many investors can only dream of! How did he manage to achieve this?
George Soros and “reflexivity“
To start with, Soros’s approach to investing is different from Warren Buffett’s. The Sage of Omaha focuses on accounting and business fundamentals. But the founder of Quantum Fund takes a behavioural approach towards market movements. He doesn’t think that the companies’ shares move according to changes in their fundamentals. Instead, he thinks that market participants’ actions are fundamentals themselves. That is, they are what is behind any booms and busts. The billionaire calls this his “reflexivity” theory. And, he uses it to make abnormal profits.
For example, the current Nasdaq rally is a typical situation Soros would use to his advantage. Because of the Covid-19 crisis, the Fed started pumping money in the financial system. Many people got stuck at home. And some of them began trading out of boredom and fear of missing out. So, this led to a wild stock market rally. The demand for equities was selective, though. Mostly high-tech stocks were bought at unbelievable prices. The most obvious example of this is Tesla. The accounting fundamentals aren’t there but the investor enthusiasm seems to be infinite. One trader even joked that high-growth shares were taking the place of US Treasuries. Anyway, Soros would probably start short-selling Nasdaq because he’d expect such a bubble to burst.
Currency speculations
Another important aspect of George Soros’s investing strategy is the trading of commodities and currencies. Warren Buffett considers such trading to be highly speculative and unpredictable. But the founder of Quantum Fund doesn’t.
In fact, one of his most famous currency bets was “breaking the Bank of England” in 1992. Back then the Bank of England really struggled to keep the pound strong – inflation was high at the time. So, the BoE kept making currency manipultions to keep the pound afloat. It spent plenty of money to do so. But it was pointless, because Soros and other currency manipulators made bets against the pound. The billionaire borrowed many loans in pounds, converted them in other currencies, including the German mark. He then announced his bearish case against the pound. Many people started getting rid of the pound and BoE understood that supporting the currency made no sense. So, the pound crashed and Soros made $1bn on the deal.
Can following this strategy help me retire early?
In my opinion, following Soros’s strategy is not necessarily going to help us all get rich and retire early. To start with, currency and commodity operations are quite risky due to their volatility. They are quite hard to predict too. Short-selling irrational rallies is even riskier than that. That’s because it’s hard to say when it will be over. An investor can be badly hurt if they doesn’t get the timing right. I’d rather go for buying shares based on their fundamentals.
